What stocks have had a 52-week low?
tastytrade logo
uploaded image

Sep 19, 2018

The Effect of Vega

By:Sage Anderson

While many traders focus a lot of attention on delta and theta, another "Greek" that is very important to monitor is vega.

As a reminder, the "Greeks" refer to a group of parameters that measure the different risk characteristics of a given options position. For example, an option's delta provides insight on how much its value will change for every $1 change in the underlying stock. Theta tells us how much an options value will theoretically change with the passing of each day.

Vega is the Greek that reports how the value of an option changes with increases or decreases in implied volatility. In this regard, vega helps traders understand how sensitive an option is to changes in the “speed of the market.”

Looking at an example, imagine a hypothetical put in SPY has a vega of 0.20. That means that if the VIX goes up by 1, the value of that option will theoretically increase by $0.20. Likewise, if the VIX drops by 1, then the value of that option should theoretically decrease by $0.20. If you are short the option and the VIX goes down by 1, that’s obviously beneficial to the position.

Because vega is so crucial to the ever-changing value of an option, it's important for traders to understand its dynamics and behavior, a topic that was recently highlighted on a new installment of Market Measures, entitled "The Effect of Vega."

The first important point illustrated on Market Measures is the fact that vega approaches zero as expiration draws closer, as demonstrated in the chart below:

Considering that most options traders opt to get short premium when implied volatility is “rich,” the above appears to work to the advantage of such an approach - especially when banking on a reversion to the mean. How then, can traders maximize the vega component of a given position?

In order to understand that, we briefly need to point out that vega is positively correlated to the following variables:

  • Time

  • Price of the underlying

  • Implied Volatility

Given that high levels of implied volatility are already a trading signal for many short premium approaches, we can move past that one relatively quickly when talking about the analysis of a potential trade.

In addition, we may not necessarily want to make trading decisions solely based on the “price of the underlying,” which means the remaining variable listed above deserves some extra attention.

The remaining factor listed above is “time” - meaning that traders seeking to capitalize on high vega should also be reviewing positions with a higher number of “days-to-expiration” (TE). This indicator dovetails extremely well with previous tastytrade research suggesting that “45 DTE” represents a potential “sweet spot” for short premium positions.

By extending the time to expiration, short premium traders can therefore try and leverage both vega and theta for contributions to the bottom line.

Not too long ago, a separate installment of Market Measures compared the side-by-side historical performance of options with 7 days-to-expiration (weeklies) to that of 45 days-to-expiration options (monthlies), and the results of this research further support the notion that longer-dated options “pack more punch.”

We hope you’ll take the time to review the shows focusing on vega and weekly vs. monthly performance when your schedule allows.

If you have any outstanding questions on vega, or any other trading-related topic, don’t hesitate to reach out by leaving a message in the space below, or sending an email to

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.